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Analysts Concerned Rising Oil Prices Could Trigger Recession - 2004-05-27

World oil prices this week soared to their highest levels ever, reaching nearly $42 per barrel before pulling back. While rising prices are good for oil exporting nations, they are bad for consumers who have to pay more to fill their tanks.

In consuming nations, the concern is that rising oil prices could trigger a recession. Saudi Arabia, the world's biggest oil exporter, is also concerned. Its oil minister, Ali Naimi, says that if prices rise too high, a global recession could reduce demand and lead to a collapse in oil prices. Saudi Arabia is about to boost production to meet the rising demand that has accompanied the significant rebound in world economic growth.

Oil prices have risen 35 percent in the past year, a far higher increase than was expected by people familiar with the oil market. Analyst Robert Ebel of Washington's Center for Strategic and International Studies says that officials in the Bush administration expected that once Saddam Hussein was toppled and Iraqi oil was back on the market, prices would fall.

?Vice-President [Dick] Cheney thought they'd be producing three million barrels a day by the end of 2003,? he said. ?They'll be fortunate to be producing three million barrels at the end of this year.?

There are other reasons besides the turmoil in Iraq for the price rise. Oil inventories, particularly in the United States, are low. Global demand for oil is outpacing supply. Jerry Taylor is an energy analyst at the Cato Institute here in Washington.

?In this particular case, production has not been curtailed,? he noted. ?It's just that global demand has been far stronger than most people have anticipated.?

Economists now expect prices will remain relatively high. They say that higher demand from the fast growing Chinese economy has been a big factor in driving up prices. Jerry Taylor of Cato said that demand from China is driving the price increase.

?In one sense, it's a good news story. It's good for the global economy that China is growing to that extent,? he added. ?But one of the ramifications of that growth are temporary price increases for a lot of commodities, oil being just one of them.?

Unlike past price shocks-like 1979 and 1990, many economists believe the world economy this time can absorb a $40 oil price without falling into recession.

OPEC oil ministers are meeting June 3 and they are expected to agree on a production increase.